The Fed bought large quantities of Treasury and mortgage bonds
during the Great Recession and financial crisis of 2007-2009 in
an effort to push down long-term borrowing costs and to stimulate
an economy and credit markets that had ground to a halt. The
policy, controversial in some quarters, was widely known as
quantitative easing.

So the beginning of the reversal of QE is a big deal, even if Fed
officials, leery of jittery bond investors, continue to reassure
Wall Street that the gradual pace of reduction in the Fed's
reserve base will mean there is little market impact.

Scott Anderson, the chief economist at Bank of the West, says the
coming gathering of the rate-setting Federal Open Market
Committee is "the biggest meeting of the year" for the central
bank.

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That's because what Chair Janet Yellen has to say in her
quarterly press conference will lay the groundwork for
expectations of a possible interest-rate hike in December and
inform the outlook for the next year, Anderson wrote in an email
to reporters.

He thinks the Fed is being too sanguine about the potential
impact of unwinding QE, which it intends to accomplish by
gradually reducing and eventually eliminating reinvestments of
maturing bond returns back into the central bank's portfolio.

"Ongoing balance sheet reduction at the same time fed funds rate
hikes continue at the same pace as this year might be too much
tightening too soon for the expansion to bear without adverse
consequences," Anderson said.

Anderson said he was "increasingly uncomfortable" with Fed
policymakers' own projections that the central bank would raise
interest rates three more times next year and in 2019.

Uncertainty about the path of interest-rate policy is heightened
by an extensive round of looming top-level turnover at the Fed,
including a possible replacement of Yellen when her term expires
early next year and the appointment of a new vice chairman
following
the early resignation of Stanley Fischer.

"We still expect one more quarter-point hike from the FOMC in
December, but no longer align with the Fed median for 2018 and
2019," Anderson said. "We forecast only two quarter-point hikes
now for 2018 and 2019."

The main reason? Inflation continues to chronically undershoot
the Fed's target, suggesting the labor market is not as firm as
the official 4.4% jobless rate suggests.

In addition, "bond market inflation expectations remain well
below historical norms, and the two- to 10-year Treasury spread
has narrowed since the beginning of the year," Anderson said.

"This is a sign that the Fed could be pushing too hard to
normalize monetary conditions, and the growth and inflation
outlooks are at risk. Both bond market signals counsel a go-slow
approach from the FOMC going forward."